I posted a comment in Tom Baigrie’s recent and excellent article in Money Marketing about lobbying for the advice cause and emphasised the word “demonstrate”. IFAs must break the pattern of top-down financial hierarchy, they must “demonstrate” a different way of doing things, not in theory but in practice.
Last month saw the interim report from the Independent Commission on Banking – does that report offer a unique opportunity for IFAs? I believe it does.
At its simplest, the ICB ischarged with suggesting ways in which the public no longer have to bail out failed banks, and ways in which more competition can be introduced into the world of banking. I believe IFAs can demonstrate a unique role in achieving both those objectives, and do so crucially with the involvement of their clients and the wider public. It involves a number of steps.
Let me start with this comment from David Hall, chair of the FSCS: “The costs of failure must be pooled across the industry if the FSCS is to meet its obligations to consumers, and those costs can in turn be redistributed, but not reduced or avoided.” That for me is an admission of both regulatory and intellectual failure, and it goes beyond the costs faced by IFAs.
When the FSA failed to adequately regulate the risks inherent in the activities of RBS, HBOS and Northern Rock the costs of those failures were also redistributed, and every member of the public is faced with both the costs and economic consequences of bailing the banks out..
Why do I believe Hall is unequivocally wrong in saying that these costs cannot be reduced or avoided? Well, it is true that they won’t be every time the FSA, or its replacements fail. But they can be every time IFAs produce an alternative to regulatory failure and with some assistance from a few IFAs and their clients I believe that can be proven. Want to help me prove it – for your own benefit, that of your clients and the wider public?
How? Let me start with this quote from Mervyn King to the Treasury select committee, “Individual retail depositors are protected through the FSCS, and the deposit protection scheme, now up to £85,000 per individual account, per individual bank, is a means of saying to depositors, even if the bank fails your money will be safe.”
The recent advertising campaign from the FSCS gave much the same message to the public – you can trust the banks, because if they fail, you will receive compensation – up to a limit. You will also find the subject addressed in the recent ICB report.
However, for me, all such comments offer a solution to the public based on the acceptance of failure – when what is needed are alternatives, alternatives which avoid failure. Here is one example of such failure, accepted by the FSA, the EU and the ICB. It involves what they call temporary high balances – balances which exceed the FSCS limit of £85,000.
Ask those – who buy a house with a mortgage, how they would react if the bank which temporarily holds those funds goes bust, whilst the mortgage funds are in their solicitor’s bank – yes, tell them they will only receive £85.000, but also tell them they will still retain the ongoing liability for any excess above that amount?
Ask those – who sell their house before re buying – for their reaction if the bank which temporarily holds those funds goes bust – tell them they will only receive £85.000, and then tell them it is called regulatory imposed downsizing.
Ask those – in charge of winding up an estate in excess of £85,000 how they would feel – whilst the CEO of the bailed out bank still has his pension for life?
Ask those – who have been lucky enough to win the National Lottery, and receive their cheque from Camelot to put in their bank – do we warn them of the risks they face, or do we all just deem it just another gamble, the one we are asked to accept when we use any bank?
Ask those – who have suffered severe industrial or road accident injuries involving substantial payments of compensation, should we just say sorry, here is £85,000 and you will just have to make do without a ramp and narrow doorways?
Now ask – the FSA, the EU or the ICB not whether they have consulted, but what they have actually done to prevent the consequences of such events. There are many such events, they are not extreme, they are events which can be drawn from the daily lives of ordinary people.
However, (and it most certainly does not need passes in exams), it is in such examples, of which this is only one, where I believe that IFAs can adopt a unique role, and where they can succeed on behalf of their clients, and the wider public, where the hierarchical nature of regulation seems once again doomed to failure.
I believe that IFAs do have a unique opportunity, much as outlined in Tom Baigrie’s article, but they need to demonstrate it. In my next article I will explain how. Want to help?
Mike Fenwick is an industry consultant